Political gouging

October 10, 2005

Residents are continuing to wrestle with the notion of price gouging as it concerns their outlay for natural gas or heating oil.

One segment of the population seems to understand the influence of supply and demand. As global demand for petroleum grows and supply momentarily slips, existing supplies become more valuable in the eyes of the market (even though those existing supplies might have been obtained when the price was lower).

Seemingly more difficult to understand is that price setting is governed by few legal standards. That's one result of the economic freedom that is a foundation of the world's most vibrant economy. Price-fixing by competitors is illegal; price-fixing by the government, in those rare instances where it occurs, is often associated with black-marketing, untenable surpluses or, as the case may be, shortages.

Some readers have said in recent weeks that they are certain that price gouging exists because, with their own two eyes, they have seen a disparity of prices for the same product, sometimes within the same community.

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But of course the prices aren't identical from outlet to outlet. Each proprietor is entitled to set a price that he or she determines will attract customers, cover costs and produce a profit. Anyone who doubts that should compare the price of popcorn in a movie theater with the price at a convenience store.

But, it might be rejoined, popcorn is a luxury. Fuel is a necessity. So the inflation of fuel prices occupies a lower moral plane than overcharging for a bag of popcorn.

Certainly it would be immoral, in addition to illegal, for fuel suppliers to jointly lay aside their competitive urges and conspire to establish an artificially high price. And indeed, it's not immoral so much as irritating to be overcharged for popcorn.

But ultimately the individual entrepreneur has the last word in what to charge, even if it is the highest price in town. If the market won't bear it, the price must come down.

In a competitive situation - and the gasoline market is highly competitive - a price that is noticeably higher than the competition's often will mean reduced sales, forcing the higher price down to a more competitive level.

These matters are timely for two reasons. First, it is unfair to assume the existence of price gouging merely on the basis of observing a disparity of prices. A disparity of prices is one sign that the marketplace is operating as it should. There would be more reason for suspicion if every outlet in the city sold the product for exactly the same price.

Second, any politician who seeks political favor by railing against price gouging ought to be pressed for details about what, exactly, he or she seeks to combat. Is a markup of 10 cents a gallon excessive? Fifty cents? A dollar?

Where, precisely, is the line that distinguishes between this elusive offense called price gouging and the legitimate economic decisions that are part of the heritage of a free market society?